[Date]
[Client Representative]
[Client Name]
[Address]
[City, State Zip]
Re:
Observance of Corporate Formalities and Other Post Incorporation Matters
Dear [Client Representative]:
Enclosed, please find the minute book of [Client Name] (the "Corporation"), which contains a certified
copy of the articles of incorporation, the original bylaws, and [other incorporation documents, e.g.,
incorporator's action, initial meeting of directors]. I am also enclosing [copies of the exemption
applications, the Corporation’s first statement by domestic nonprofit corporation and any documents not
included in minute book]. The corporate secretary should retain all of these items in a safe place.
We appreciate the opportunity to have assisted you and the Corporation in its incorporation and
application for recognition of exemption from federal income tax. We understand that our representation
is now concluded. [OPTIONAL: except for the purpose of completing the California tax exemption
process.]
Now that the Corporation has been formed, it will be faced with numerous legal requirements in order to
maintain its corporate and tax-exempt status. The requirements outlined in this memorandum derive from
the California Corporations Code, which imposes various rules for a nonprofit public benefit corporation
under California corporate law, and the Internal Revenue Code and California Revenue and Taxation
Code, which impose certain requirements in order to maintain tax-exempt status for both federal and state
tax purposes.
If you have any questions, please feel free to contact me.
Sincerely,
_______________________________
[Attorney Name]
Enclosure
MEMORANDUM
TO:
Directors and Officers of [Client Name]
FROM: [Attorney Name]
RE:
Nonprofit Corporate Requirements
This memorandum outlines the most frequently encountered legal requirements facing nonprofit
California corporations. The topics addressed are:
A.
OBSERVANCE OF CORPORATE FORMALITIES AND MEETINGS OF DIRECTORS ..... 3
B.
DIRECTORS’ DUTY OF CARE ...................................................................................................... 4
C.
DIRECTORS’ DUTY OF LOYALTY .............................................................................................. 5
1)
2)
3)
D.
INTERESTED DIRECTORS ................................................................................................................... 5
CORPORATE OPPORTUNITY ............................................................................................................... 5
SELF DEALING ................................................................................................................................... 6
TAX MATTERS ................................................................................................................................. 6
1)
2)
EMPLOYER IDENTIFICATION NUMBER .............................................................................................. 6
MAINTAINING FEDERAL TAX-EXEMPT STATUS AND PUBLIC CHARITY STATUS ............................. 6
a) Limit On Activities That Do Not Further Charitable Purpose ..................................................... 6
b) Limit On Private Benefit and Inurement ....................................................................................... 7
c) Limit On Lobbying and Prohibition On Political Activity ............................................................ 7
d) Public Charity Status .................................................................................................................... 7
e) Public Support Test to Maintain Public Charity Status and Recordkeeping ................................ 7
f) Consequences of Failure to Maintain Public Charity Status........................................................ 8
3) UNRELATED BUSINESS INCOME TAX ................................................................................................ 8
4) OTHER TAXES ................................................................................................................................... 9
a) Federal Private Foundation Excise Tax ....................................................................................... 9
b) California Franchise Tax .............................................................................................................. 9
c) Sales and Use Taxes.................................................................................................................... 10
d) Local Business License Taxes ..................................................................................................... 10
e) Property Tax ............................................................................................................................... 10
f) Employment Taxes ...................................................................................................................... 10
5) TAX RETURNS ................................................................................................................................. 11
a) Federal ........................................................................................................................................ 11
b) California State ........................................................................................................................... 11
E.
OTHER POST-INCORPORATION MATTERS AND FILING REQUIREMENTS .............. 12
1)
2)
STATEMENT OF DOMESTIC NONPROFIT CORPORATION – BIENNIAL FILING REQUIRED ................ 12
FILING WITH THE REGISTRY OF CHARITABLE TRUSTS – REGISTRATION AND ANNUAL FILING
REQUIRED........................................................................................................................................ 12
1
3)
4)
BUSINESS LICENSES ........................................................................................................................ 13
LOCAL SOLICITATION ORDINANCES – FILING REQUIRED BEFORE FUNDRAISING CAMPAIGN OR
EVENT ............................................................................................................................................. 13
5) OTHER FUNDRAISING LAWS ........................................................................................................... 14
a) The Nonprofit Integrity Act of 2004 ............................................................................................ 14
b) Federal Substantiation Requirements for Charitable Contributions .......................................... 14
c) Raffles and Bingo ........................................................................................................................ 14
d) Other States................................................................................................................................. 15
6) INSURANCE...................................................................................................................................... 15
7) RECORDKEEPING AND REPORTS ..................................................................................................... 15
a) Recordkeeping............................................................................................................................. 15
b) Annual Report ............................................................................................................................. 16
c) Required Federal and State Filings on Amendment of Articles or Bylaws ................................. 16
8) HEALTH AND SAFETY HAZARDOUS MATERIALS FEE ..................................................................... 17
9) ACCOUNTING AND FINANCIAL INFORMATION ................................................................................ 17
F.
CONCLUSION ................................................................................................................................. 17
The discussion of each topic is summary in nature and not exhaustive. Sections D.5, E.1 and E.2 of this
memorandum include important information about filing requirements for all nonprofits. Failure to
complete these filings on time may result in the revocation of the corporation’s tax exemption or its
corporate status in California. It is very important that someone involved in the corporation’s
management read this information and calendar important dates. I encourage you to contact counsel for
further clarification or advice.
2
A. Observance of Corporate Formalities and Meetings of Directors
Incorporating as a nonprofit corporation provides the Corporation with certain advantages, such as certain
protections from liability, a perpetual business existence, and eligibility for special treatment under the tax
codes. However, the Corporation can only enjoy these advantages if it maintains what are called
“corporate formalities.” Corporate formalities are the basic rules and procedures for governing and
operating a corporation (the Corporation’s bylaws describe many of these formalities). To keep its
corporate status, the Corporation will want to follow and, most importantly, keep records of all of these
formal corporate activities.
Directors' meetings are perhaps one of the most important corporate formalities. Although there is no
statutory requirement with respect to how frequently the board of directors should act, we suggest that the
board of directors meet on a regular basis to deal with significant matters that have arisen during the
quarter. [This section should be revised to reflect the Corporation’s bylaws]. In any case, your
organization’s bylaws [mandate _________ meeting(s) of the board per year]. Generally, board action
may be taken by a majority of the directors present at the meetings, provided that the meeting contains a
quorum ([fill in the definition of quorum from the Corporation’s bylaws here]). Alternatively, board
action may be taken by the unanimous written consent of the directors without a meeting.
Generally, matters appropriate for board action include the following:
1. Election of officers, which must include a chairperson or president (the Corporation may elect to
have both), a secretary, a CFO or treasurer (or both), and other officers as stated in bylaws or
determined by the board (multiple offices may be held by the same person, except that neither the
secretary nor CFO or treasurer may serve concurrently as president or chairperson);
2. Review of financial arrangements, including review of investments, opening and closing of
corporate accounts, designation and change of corporate officers authorized as signatories, review
of cash flow needs and review of financial statements;
3. Approval of material contracts and leases;
4. Policy decisions with respect to the expenditures of funds and the making of grants and
ratification of those grants made;
5. Amendment of the articles of incorporation;
6. Amendment, repeal or adoption of bylaws;
7. Electing directors, filling vacancies on the board, and removing directors in some instances;
8. Appointing any board committees;
9. Employing and monitoring activities of the executive director/CEO, if any;
3
10. Adopting budgets;
11. Appointing auditors;
12. Complying with governmental reporting requirements;
13. Bringing or defending legal actions;
14. Approving indemnification of corporate directors, officers and other agents;
15. Approving corporate borrowing or loans;
16. Approving the mortgage or other hypothecation of corporate property to secure payment or
performance of contracts or obligations;
17. Approving the sale, lease, conveyance, exchange, transfer, or other disposition of corporate
assets;
18. Approving mergers, reorganizations and dissolutions; and
19. Any other matters not delegated to an officer of the Corporation.
The secretary of the Corporation should prepare minutes or a written consent form evidencing any board
actions. [Note that if the Corporation has members, they also have voting rights with respect to
some of the above transactions, and this letter should be revised accordingly. See California
Corporations Code §§ 5310-5354.]
The Corporation’s board (or a board committee) must also review and approve the compensation
(including benefits) of the Chief Executive Officer/President and Chief Financial Officer/Treasurer, to
verify that it is just and reasonable. Such review must be performed at the time of hiring, and whenever
the compensation is modified or the employment term is extended. See California Government Code §
12586(g).
Also, any nonprofit corporation with annual gross revenues of more than $2 million (not including
amounts received from governmental agencies if the government requires the corporation to account for
the money received) must have an audit committee of the board of directors, and must obtain an audit of
the corporation’s financial statements that is approved by that committee. If the Corporation has $2
million or more of gross revenues in any one year, you should consult an attorney about the audit
committee requirements.
B. Directors’ Duty of Care
The board of directors is generally responsible for managing the corporation. Although the board may
delegate some of the management functions and corporate powers to others, the acts of such delegates
must always be under the board's ultimate control and direction. Directors must, therefore, use due care
in so delegating their authority.
4
Directors are considered fiduciaries of nonprofit organizations.1 Therefore, as a general proposition, a
director must perform his or her duties in good faith, in a manner he or she believes to be in the best
interest of the corporation, and with such care, including reasonable inquiry, as an ordinarily prudent
person in a like position would use under similar circumstances. Each director has an obligation to ensure
that the Corporation acts in accordance with its corporate purposes (as expressed in the Corporation's
articles of incorporation and bylaws) and with all applicable laws.
In performing the duties of a director, the director is entitled to rely on information, opinions, reports or
other statements (including financial statements and data) prepared by officers or employees of the
corporation, legal counsel, independent accountants, or other persons, so long as the director has a
reasonable belief in the presenter's reliability, competence, and/or expertise and acts in good faith. The
director may be obligated to conduct a reasonable inquiry into the information to be relied upon when the
need for such inquiry is indicated by the circumstances. Of course, a director may not rely on any
information received when he or she has knowledge of facts that would cause such reliance to be
unwarranted.
Members of the board should also be aware that special duties are required with regard to assets held by
the corporation for investment. The board must avoid speculation, consider the probable income of the
investment, as well as the probable safety of the corporation's capital, and comply with any agreement
pursuant to which assets are contributed to the corporation.2
C. Directors’ Duty of Loyalty
Directors are obligated to act in the best interests of the corporation and all of its members, including the
members of any minority factions, and to administer their corporate powers for the common benefit.
Several issues come up repeatedly in the operation of nonprofit corporations, and should be kept in mind
as directors exercise their duties.
1) Interested Directors
No more than 49% of the directors of the Corporation may be "interested persons," i.e., persons (or their
close relatives) currently being compensated for services rendered to the Corporation during the past year,
excluding reasonable compensation paid to them for serving as directors. Any compensation, regardless
of the amount, will make a director an "interested person" for this purpose. Under the interested person
rule, fewer than half the directors can be made up of officers, employees, consultants, or their close
relatives, and more than half must be "outside" directors who do not receive any compensation from the
Corporation other than for serving as a director.
2) Corporate Opportunity
If a director becomes aware of an opportunity or transaction that would be of interest or benefit to the
Corporation, the director generally must disclose such opportunity to the Corporation and permit it to take
advantage of the opportunity, if it so desires. If such an opportunity is presented, and the Corporation
declines to act, the director may then pursue the transaction for his or her own advantage.
1
2
See Scheuer Family Foundation, Inc. v. 61 Associates, 179 A.D.2d 65, 582 N.Y.S.2d 662 (1st Dept. 1992).
See Cal. Corp. Code § 5240 for requirements relating to assets held for investment.
5
3) Self Dealing
"Self-dealing" transactions are those in which the Corporation is a party and in which one or more of its
directors has a "material financial interest." A director with a material financial interest in the transaction
is termed an "interested director." Transactions in which a director has a material financial interest are
not prohibited completely, but are permitted only if the Corporation is acting in its own interest and for its
own benefit, and the transaction is approved by one of the following methods:
1. Approval by the California Attorney General (please note that this is generally the only method
by which a loan to or a guarantee of an obligation of a director or officer can be approved), or by
a court in an action in which the Attorney General is a party. In most cases, this alternative will
not likely be useful.
2. Approval by the board of directors (or, in certain limited circumstances, a committee of the
board) of the transaction, which approval must be obtained before any part of the transaction is
consummated. In addition, the transaction must be fair and reasonable to the Corporation at the
time it is entered into. The board's authorization or approval of the transaction must be in good
faith, made by directors with knowledge of the material facts concerning the transaction and the
directors' interest in the transaction, and approved by a vote of a majority of the directors then in
office without counting the vote of an interested director or directors.
If the transaction is approved by the board of directors without Attorney General approval, then either (i)
before approving the transaction, the board must reasonably investigate and consider alternative
arrangements and in good faith determine that the corporation could not obtain a more advantageous
arrangement with reasonable effort under the circumstances, or (ii) the transaction terms must be such that
in fact, the Corporation could not have obtained a more advantageous arrangement with reasonable effort
under the circumstances.
D. Tax Matters
1) Employer Identification Number
The Corporation has applied for and received a federal employer identification number (“EIN”) that will
be used on its federal tax returns and certain other documents. For your reference, that number is [EIN
number].
2) Maintaining Federal Tax-Exempt Status and Public Charity Status
a) Limit On Activities That Do Not Further Charitable Purpose
In order to maintain tax-exempt status, an organization must continue to meet each of the requirements
that qualified it for federal tax exemption in the first place. In particular, an organization must be
operated primarily for the charitable purposes set forth in its organizational documents. Non-charitable
activities are permitted only if they are insubstantial (for example, in terms of time and money expended)
in relation to charitable activities. In evaluating an organization’s primary purpose, the IRS will consider
the particular manner in which activities are conducted, including whether they are conducted in a
6
commercial manner, their scope, and the amount of profit generated by them. Any change in the
activities or purposes of the Corporation must be monitored to ensure that it continues to comply with the
purposes set forth in the articles of incorporation and bylaws. In addition, any changes to the articles of
incorporation or bylaws must not permit the Corporation to engage in activities that are not in furtherance
of exempt purposes, except as an insubstantial part of the Corporation’s activities.
b) Limit On Private Benefit and Inurement
The net earnings of an exempt organization may not benefit organizational “insiders,” and the
organization’s activities may not confer a direct or indirect benefit on any private persons.
c) Limit On Lobbying and Prohibition On Political Activity
Also, a substantial part of the organization’s activities cannot consist of carrying on propaganda or
attempting to influence legislation. Finally, the organization may not participate or intervene in any
campaign for or against a candidate running for office.
An organization that fails to meet the above requirements on an ongoing basis will lose its exemption
from federal income tax. (Note: to the extent that exemption from other taxes, such as the California
franchise tax (discussed below), depends on meeting the requirements for federal exemption, losing
federal tax-exemption also may cause the loss of such other exemptions.)
d) Public Charity Status
As a reminder, the Corporation has applied for tax exemption as a public charity. Organizations
designated as public charities will usually be described under either Internal Revenue Code
§ 170(b)(1)(A)(vi) or § 509(a)(2).
Alternative 1: [If, upon reviewing the Corporation’s application for tax exemption, the IRS determines
that the Corporation can reasonably be expected to be publicly supported, the IRS will automatically
classify the Corporation as a public charity for its first five years of existence. The IRS determination
letter will indicate whether § 170(b)(1)(A)(vi) or § 509(a)(2) applies to the Corporation.]
Alternative 2: [The IRS has determined that the Corporation can reasonably be expected to be publicly
supported and has automatically classified the Corporation as a public charity under § [fill in section
stated on determination letter: 170(b)(1)(A)(vi) or 509(a)(2)] for its first five years.]
Donors will be entitled to rely on the determination letter in making donations to the Corporation unless
the IRS changes the Corporation’s status and publishes a notice of the change. The Corporation must
inform the IRS of any change in its sources of support, purpose, character or method of operation, and
any amendments to its articles of incorporation or bylaws.
e) Public Support Test to Maintain Public Charity Status and Recordkeeping
Beginning with its sixth taxable year, the Corporation must establish that it is a public charity by showing
that it meets the public support test under § 170(b)(1)(A) or § 509(a)(2) on Schedule A to Form 990/990EZ.
7
To qualify as a public charity under § 170(b)(1)(A)(vi), the Corporation must either receive at least 33
1/3% of its support from governmental units or contributions made directly or indirectly by the general
public or, in the alternative, it must receive at least 10% of its support from these sources and demonstrate
“facts and circumstances” sufficient to support its classification as a publicly supported organization, such
as a program geared towards continuous solicitation of funds.
To qualify as a public charity under § 509(a)(2), the Corporation must receive more than 33 1/3% of its
support from governmental units or contributions made directly or indirectly by the general public,
including gross receipts from exempt purpose activities such as charitable sales of merchandise, and must
receive NOT more than 33 1/3% of its support from the sum of its gross investment income and its net
(after tax) unrelated business income (see below). The Corporation should consult with an attorney or
accountant for more detailed information on these tests.
The Corporation will lose its public charity status if it cannot pass the public support test for two
consecutive years. To avoid unexpectedly losing its public charity classification, the Corporation should
keep track of its public support information (i.e., records of who donated funds and how much was
donated) throughout the year instead of waiting until the end of the tax year when it is preparing Schedule
A to Form 990/990-EZ. Also, the Corporation should calculate whether it is meeting the public support
test during its first five years of existence to address and correct any public support issues before the sixth
year.
f) Consequences of Failure to Maintain Public Charity Status
If the Corporation cannot meet the public support test for two consecutive years, it will be reclassified as
a private foundation as of the start of the second consecutive year. Private foundations are also taxexempt, but are subject to additional rules and excise taxes.
3) Unrelated Business Income Tax
A nonprofit organization otherwise exempt from federal income tax is taxed on net income realized from
a regularly conducted trade or business that is unrelated to the organization’s exempt purpose (this is
referred to as “unrelated business taxable income,” or “UBTI”). (Note: such a business must be
“insubstantial” or the organization will lose tax-exempt status altogether, as described above.) Generally,
a trade or business is an activity that involves selling goods or services to produce income. The fact that
profits from such activity are essential to the organization’s ability to carry out its exempt purpose does
not turn an “unrelated” business into a “related” one. Instead, the business must be connected to the
exempt purpose by more than the mere production of funds in order to avoid the tax on net income.
Even if there is an unrelated trade or business, its net income is only taxed if the business is regularly
carried on. In determining whether a trade or business is regularly carried on, the frequency and
continuity of the business are compared with the frequency and continuity of a similar business conducted
by a non-exempt organization. Generally, an activity is not regular if it is carried on only one or two
weeks per year. Infrequent conduct such as an annual fundraising event is not regular. Because the
determination of whether a trade or business is unrelated or regularly carried on depends on the particular
facts of each situation, I encourage you to consult counsel for further advice on the specific activities of
the Corporation.
8
Dividends, interest, annuities, royalties, and capital gains are excluded from UBTI in most circumstances
because they are not generated from a trade or business. Because of these exclusions, consideration
should be given to structuring transactions to produce one of these types of income where feasible. For
example, publication and sale of a book by an exempt organization may result in income taxed as UBTI,
but a royalty received as a result of a transfer of publication rights to a commercial publisher may not.
4) Other Taxes
a) Federal Private Foundation Excise Tax
As discussed in Section D.2(d) above, the Corporation has applied for tax exemption as a publicly
supported charity. If the Corporation does not receive a determination letter from the IRS stating that it is
not a private foundation, or if it is classified as a publicly supported charity and fails the public support
test for two consecutive years, then the Corporation will be treated as a private foundation. Private
foundations are required to pay federal excise tax in estimated quarterly installments, and are subject to
other taxes and restrictions that are beyond the scope of this memorandum. If the organization is a private
foundation, you should consult your accountant in the near future regarding applicable excise taxes.
b) California Franchise Tax
The California franchise tax is the equivalent of an income tax assessed on the net income of corporations
doing business in California. Certain nonprofit organizations are exempt from the California franchise
tax.
Alternative 1: [However, such exemption is not automatic. In order to qualify, the Corporation must file
form FTB 3500 and receive a “determination letter” from the California Franchise Tax Board. Form FTB
3500, is available at www.ftb.ca.gov/forms/misc/3500.pdf. The instructions can be found at
www.ftb.ca.gov/forms/misc/3500bk.pdf.]
Alternative 1A: [However, such exemption is not automatic. In order to qualify, the Corporation must
file form FTB 3500A with a copy of its federal determination letter and receive a letter acknowledging
receipt and specifying the effective date of its exemption under California law. Form FTB 3500A, along
with instructions, is available at www.ftb.ca.gov/forms/misc/3500a.pdf.]
Alternative 2: [The Corporation has applied for tax exempt status from the California Franchise Tax
Board by filing form FTB 3500, and if the exemption is granted, the Corporation will receive a
“determination letter” from the Franchise Tax Board.]
Alternative 2A: [The Corporation has applied for tax exempt status from the California Franchise Tax
Board by filing form FTB 3500A with a copy of its federal determination letter. The Corporation will
receive a letter acknowledging receipt and specifying the effective date of its exemption under California
law from the Franchise Tax Board.]
9
If the Corporation conducts activities outside of California, it should consult an attorney to determine
whether it needs to apply for tax exempt status in those other jurisdictions.
c) Sales and Use Taxes
Even though the Corporation is tax-exempt, it is still generally subject to state and local sales and use
taxes if it engages in the sale of tangible personal property. Refer to the California State Board of
Equalization website (www.boe.ca.gov/sutax/sutprograms.htm) for more information about whether your
organization’s activities might subject it to such tax, or whether the activities may be exempted.
d) Local Business License Taxes
Some cities, including Los Angeles, impose business license taxes on all businesses conducted within the
city. Tax-exempt organizations generally are exempt from such taxes, but certain actions may be required
in order to qualify for exemption. For example, in the City of Los Angeles, the organization must file a
business license tax exemption application documenting that it is tax-exempt. For more information
about the City of Los Angeles business tax exemption, visit the City of Los Angeles Office of Finance
website http://finance.lacity.org/content/NonProfitCharitableOrganizationExemptions.htm.
e) Property Tax
If the Corporation owns property in California, it is not automatically exempted from paying property
taxes by virtue of its federal or state tax-exempt status. All property in California is taxable unless
exempt under the laws of the United States or the California Constitution. Under California law, the
Legislature may exempt property from taxation if the property is used exclusively for religious, hospital,
scientific, or charitable purposes and is owned or held in trust by corporations or other entities (1) that are
organized and operating for those purposes, (2) that are nonprofit, and (3) whose net earnings do not inure
to the benefit of any private shareholder or individual.
If you believe the Corporation qualifies for the so-called “welfare” exemption described above, you must
obtain an Organizational Clearance Certificate for the Corporation from the California State Board of
Equalization by filing Form BOE-277 (www.boe.ca.gov/proptaxes/pdf/boe277.pdf) with the Assessment
Policy Standards Division of the State Board of Equalization. After the Corporation obtains this
certificate, the Corporation must apply every year for an exemption from payment of property tax for a
particular parcel of property. The claim for exemption should be filed each year on or before February 15
with the county assessor in the county in which the property is located. Form BOE-267 is the relevant
form and should be available on the county assessor’s website (for Los Angeles County, that website
address is: http://assessor.lacounty.gov/extranet/list/forms.aspx.)
f) Employment Taxes
Most nonprofit tax-exempt 501(c)(3) corporations with employees must generally withhold federal
income taxes and social security (FICA) taxes from wages paid to employees. For more information, the
Corporation should refer to IRS Circular E (Publication 15) Employer’s Tax Guide (www.irs.gov/pub/irs10
pdf/p15.pdf). Because of the extensive record-keeping and reporting requirements involved, we urge you
to discuss these requirements with your financial advisor or accountant.
Additionally, refer to Publication DE 44 (www.edd.ca.gov/pdf_pub_ctr/de44.pdf), California Employer’s
Guide, which addresses the various California employer withholding and taxpaying obligations.
5) Tax Returns
Both federal and California tax returns must be filed each year, generally on or before the fifteenth day of
the fifth month following the close of the Corporation’s taxable year.
The following descriptions are intended to provide general information only; it is important that you
consult your accountant regarding additional requirements that may be applicable to your particular
organization, including, if applicable, special requirements for private foundations.
a) Federal
The basic annual return form is IRS Form 990/990-EZ, “Return of Organization Exempt from Income
Tax.” Certain organizations are exempt from this filing requirement, including churches and, for tax year
2012, organizations (other than private foundations) with annual gross receipts that are normally $50,000
or less. However, organizations that are exempted under this threshold – annual gross receipts of
$50,000 or less – must file IRS Form 990-N, an annual electronic notice form known as the “e-Postcard.”3
This form can be filed at http://epostcard.form990.org.
Additionally, IRS Form 990-T, “Exempt Organization Business Income Tax Return,” must be filed by an
organization that earns more than $1,000 in gross income deriving from an unrelated trade or business for
the taxable year. Federal forms are available at www.irs.gov/formspubs/index.html. Failure to file a
return or an e-Postcard, as required, with the IRS for three consecutive years will lead to automatic
revocation of federal (and likely state) tax exempt status.
b) California State
California’s basic annual return form is FTB Form 199, “Exempt Organization Annual Information
Return.” Note that churches and religious orders are not required to file Form 199. Beginning with the
2012 tax year, organizations with annual gross receipts that are normally $50,000 or less must file FTB
Form 199-N (the “California e-Postcard”), which is an electronic notice similar to IRS Form 990-N.4
This form can be filed at www.ftb.ca.gov/online/199N_epostcard.
In addition, if the Corporation has gross taxable income derived from an unrelated trade or business in
excess of $1,000 for the taxable year, it must file FTB Form 109, “Exempt Organization Business Income
3
For more information on Form 990-N, please see www.irs.gov/charities/article/0,,id=169250,00.html.
For more information on Form 199-N, please see
www.ftb.ca.gov/businesses/Exempt_organizations/Filing_Requirements_Form_199N.shtml.
4
11
Tax Return.” California state forms may be obtained from www.ftb.ca.gov/forms/search/index.aspx.
Failure to file a return or a California e-Postcard, as required, with the FTB for three consecutive
years will lead to automatic revocation of state tax exempt status.
E. Other Post-Incorporation Matters and Filing Requirements
In addition to observing the requisite corporate formalities, the Corporation is subject to numerous other
legal requirements. Although it is not intended to be exhaustive, the following list summarizes legal
requirements that a new California nonprofit corporation should be aware of. Certain requirements are
highly formal and technical, and many must be satisfied within a specified time period. Failure to comply
with these legal requirements may subject the Corporation to fines or other penalties.
1) Statement of Domestic Nonprofit Corporation – Biennial Filing Required
The Corporation must, within 90 days after the filing of the original articles of incorporation and
biennially thereafter in the month of the anniversary of the incorporation date, file a Statement of
Information (Form SI-100) with the Secretary of State, providing: (1) the names and complete business or
residence address of its CEO, secretary and CFO, and (2) the street address of its principal office. The
statement also must designate a natural person or corporation as agent for the service of process.
Whenever any of the information changes, the Corporation must file a current statement with the
Secretary of State. This form is available at www.sos.ca.gov/business/corp/pdf/so/corp_so100.pdf.
Alternatively, the Corporation may file the form online at https://businessfilings.sos.ca.gov.
2) Filing With the Registry of Charitable Trusts – Registration and Annual Filing Required
The Corporation must register with the Registry of Charitable Trusts of the California Attorney General's
office within 30 days of the organization’s initial receipt of assets. The Corporation should register
before engaging in charitable solicitations in California. The registration form (Form CT-1) is available
on the Attorney General’s website at http://ag.ca.gov/charities/forms/charitable/ct1-form.pdf.
The Corporation also must file annually Form RRF-1, a disclosure reporting form available on the
Attorney General’s website, with the Registry of Charitable Trusts. This report must be filed within four
months and fifteen days after the end of the Corporation’s fiscal year unless the Corporation has received
an extension of time to file its federal income tax return, in which case the Form RRF-1 (together with
copies of any extension from the IRS) should be filed at the same time as the federal tax return. The
report provides accountability to the public and to the Attorney General in its role as legal representative
of the public interest. Form RRF-1 and instructions can be found on the Attorney General’s website at
http://oag.ca.gov/charities/forms. Failure to file in a timely fashion could result in revocation of the
Corporation’s state tax exemption for the year in question and substantial penalties.
In addition to registering and filing Form RRF-1, the Corporation may be required to file an Annual
Financial Solicitation Report (Form CT-694) if all three of the following provisions apply: (1) the
Corporation collected more than $1,000,000 in charitable contributions from donors in California in the
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previous year, (2) such contributions represented more than 50% of the Corporation’s annual income in
the same year, and (3) the Corporation’s non-program expenses (including salaries, overhead, fundraising
expenses and travel expenses) exceeded 25% of the Corporation’s gross revenue for that year. Form CT694 is available at http://ag.ca.gov/charities/forms/charitable/ct694.pdf.
3) Business Licenses
The Corporation may be required to obtain a business license or an exemption from the license
requirement from the city in which it intends to operate. In the City of Los Angeles, tax-exempt
organizations must obtain a business license (called a “Tax Registration Certificate”) from the Office of
Finance (http://finance.lacity.org/index.htm). Please see Section D.4(d) for information about applying
for the Los Angeles business tax exemption. Information about business license and other permit
requirements in California can be found at www.calgold.ca.gov.
4) Local Solicitation Ordinances – Filing Required Before Fundraising Campaign or Event
In connection with fundraising activities, the Corporation may also be required to register with various
counties, cities and states around the country under those jurisdictions’ statutes and ordinances regulating
solicitation. For instance, solicitation registration is required by the City of Los Angeles. At least 15
business days before the start of any fundraising campaign or special event in Los Angeles, the
Corporation must complete and file a “Notice of Intention”
(www.lapdonline.org/police_commission/pdf_view/6195) with the Los Angeles Police Commission’s
Charitable Services Section. After investigation, the Corporation will be issued an Information Card
containing important facts to be considered by a prospective donor. The Corporation should not begin
soliciting contributions until it has been issued an Information Card, and must give or display a copy of
the Card to all persons solicited by the Corporation, including recipients of fundraising mailing appeals.
The original Card must also be exhibited conspicuously at the site of special events. Finally, a report
showing receipts, expenditures, and distributions of net proceeds of any fundraising campaign or special
event must be signed by two officers of the Corporation and filed within 30 days of the termination of the
campaign or special event (www.lapdonline.org/home/pdf_view/6196).
In addition to the above reporting requirements, the Corporation must maintain an accounting system in
accordance with established accounting principles, and be prepared to give each donor a signed receipt for
contributions. For a full listing of charitable solicitation guidelines in the City of Los Angeles, contact the
Police Commission’s Charitable Services Section at (213) 996-1260 or visit
www.lapdonline.org/police_commission/content_basic_view/9147. A partial list of city and county
offices with information on local solicitation ordinances can be found at
www.ceb.com/info/NonprofitsAppendixC.asp.
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5) Other Fundraising Laws
a) The Nonprofit Integrity Act of 2004
Pursuant to the Nonprofit Integrity Act, the Corporation must conduct all fundraising activities without
coercion and must not engage in any misrepresentation regarding the purpose or beneficiary of any
fundraising solicitation. The Corporation must also approve every written contract entered into in
connection with a fundraising activity conducted on its behalf. The act also governs contracts between
charities and commercial fundraisers. If the Corporation intends to hire a commercial fundraiser to
conduct a fundraising event or solicitation, you should review the provisions of California Government
Code §§ 12599 et seq.
(http://oag.ca.gov/sites/all/files/pdfs/charities/publications/nonprofit_integrity_act_nov04.pdf) and
consult an attorney with any questions. You can find a detailed summary and frequently asked questions
about these laws, including a list of specific actions that are prohibited in connection with fundraising, on
the Attorney General’s website at http://oag.ca.gov/charities.
b) Federal Substantiation Requirements for Charitable Contributions
If the Corporation expects to receive charitable contributions, federal substantiation requirements must be
met. Charitable organizations are required to provide a “written disclosure” or receipt to any donor who
contributes $75 or more in cash and receives goods or services in exchange. However, in order to
properly claim a deduction for a cash contribution of any amount, a donor is required to have a bank
record (including a cancelled check or a bank or credit card statement) or obtain a receipt (called a
“contemporaneous written acknowledgement”) from the charitable organization. Also, for a single cash
contribution of $250 or more and for any contribution of property, the donor is required to obtain an
acknowledgement from the charitable organization. Thus, it is best practice to provide a receipt for all
contributions and to keep accurate records of all donations. IRS Publication 1771 (www.irs.gov/pub/irspdf/p1771.pdf) and IRS Publication 526 (www.irs.gov/pub/irs-pdf/p526.pdf ) set forth the specific details
with respect to substantiation of deductible contributions, including the type of information that should
and should not be included in these receipts.
c) Raffles and Bingo
California law permits a charity that has been tax-exempt in California for at least one year to hold raffles
if at least 90% of the gross receipts of the raffles are used for beneficial or charitable purposes. Note that
separate registration and reporting with the Attorney General’s office is required on Forms CT-NRP-1
and CT-NRP-2, respectively. For additional information and the required forms, see
http://oag.ca.gov/charities/raffles.
Bingo is generally permitted in California so long as the proceeds thereof are used only for charitable
purposes and no profits, wages or salaries are paid from any bingo game. However, the Corporation may
be required to register with various counties and cities under those jurisdictions’ statutes and ordinances
regulating bingo. For instance, a bingo license is required by the City of Los Angeles. At least 60 days
before conducting a game of bingo in Los Angeles, the Corporation must complete and file an
“Application for Bingo License” (www.lapdonline.org/police_commission/pdf_view/6198) with the Los
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Angeles Police Commission’s Charitable Services Section, Bingo Gaming Enforcement Unit. After
investigation, the Corporation will be issued a license valid for one year.
For a full listing of City of Los Angeles bingo rules and regulations, including fees, visit
www.lapdonline.org/police_commission/content_basic_view/9147. Refer to California Penal Code §
326.5 for more information on bingo, and § 320.5 for more information about raffles.
d) Other States
Each state has its own rules and regulations regarding charitable registration. Before conducting any
fundraising activities in other states or online, the Corporation should consult with an attorney to
determine whether it needs to register in another jurisdiction. For information about the Unified
Registration Statement, a charitable registration statement accepted by most states, visit
www.multistatefiling.org/index.html.
6) Insurance
Nonprofit organizations require at least a minimal level of insurance to protect against business risks to
which all organizations are, to some extent, vulnerable. You should take the time to assess whether your
organization may have exposure in any one of seven broad areas: property, directors and officers, crime,
automobile, liability, employment practices or workers compensation. Almost all organizations will
require commercial general liability insurance, which covers negligent acts performed by the organization
or its employees. Directors and officers insurance may also be important if the organization wishes to
attract qualified volunteer board members. While California law protects volunteer directors and officers
of certain types of nonprofit corporations from liability for actions within the scope of their duties that are
taken in good faith in a manner believed to be in the best interest of the corporation, some of these
protections are only available to organizations that have purchased a specified amount of liability
insurance. California nonprofit organizations may acquire insurance through the Nonprofits’ Insurance
Alliance of California (www.niac.org), a nonprofit liability insurance pool established exclusively for
nonprofit organizations in California. For a more detailed guide to insurance issues, see the manual
entitled “Legal Issues for Small Businesses and Nonprofit Agencies” published jointly by Southern
California Edison and Public Counsel (www.publiccounsel.org/tools/publications/files/edison.pdf).
7) Recordkeeping and Reports
a) Recordkeeping
The Corporation is required by law to keep up-to-date originals or copies of (1) books and records of
account; (2) minutes of the meetings of its members (if any), board and committees of the board; (3) a
record of its members (if any) giving their names and addresses and the class of membership held by
each; and (4) business records relating to the amount, cost, and value of all property that the Corporation
owns, claims, possesses and/or controls. In addition, the Corporation must keep the following documents
at its principal office and available for inspection:
1. Articles of Incorporation and all amendments thereto.
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2. Corporate bylaws and all amendments thereto.
3. Copies of the Corporation’s tax exemption applications (any state forms including California
form FTB 3500/3500A and federal Form 1023) and determination letters.
4. Information returns on Form 990 filed with the IRS (three most recent years only).
As described above, the Corporation should keep records of all of its revenues and expenses for tax
reporting purposes, and to prove its public charity status to the IRS.
b) Annual Report
A California nonprofit public benefit corporation that receives at least $25,000 or more in gross revenues
in any fiscal year must send an annual report to each director and member (if any) within 120 days after
the close of the Corporation’s fiscal year. In addition to information regarding loans, indemnifications
and self-dealing transactions referenced in the next paragraph, the annual report should contain a
statement of assets and liabilities and revenues and expenses in appropriate detail.5
If the Corporation does not produce the annual report, it must still furnish to the board and members (if
any) a statement on the following types of loans, indemnifications and self-dealing transactions:
1. A brief description of the amount and circumstances of any loans, financial guarantees, advances,
or indemnifications totaling more than $10,000 made the previous year to any officer or director
of the Corporation (Cal. Corp. Code § 6322).6
2. A brief description of the amount and circumstances of any transaction in which the Corporation
was a party and a member of the board or an officer of the Corporation had a direct or indirect
financial interest, involving more than $50,000. (Cal. Corp. Code § 6322)
c) Required Federal and State Filings on Amendment of Articles or Bylaws
To amend the articles of incorporation, a certificate of amendment must be filed with the Secretary of
State. Generally, the Corporation sends three copies of the certificate to the Secretary of State. Once
accepted, the Secretary of State forwards one copy to the Attorney General and notifies the Franchise Tax
Board of the amendment. The Corporation must then submit a copy of the amended articles with its
California information return (Form 199) for the year in which the amendment became effective.
Similarly, if the Corporation’s bylaws are amended, the Corporation must report the amendment to the
5
Refer to Cal. Corp. Code § 6321 for specifics. The annual report may be sent less often than annually if member
meetings are held less often than annually – the annual report need be made only with the frequency with which
regular membership meetings are required, unless otherwise stated in the articles or bylaws.
6
Note that, as a general rule, California nonprofit public benefit corporations may not lend money or property to, or
guarantee the obligations of, their directors or officers, unless an exception applies or Attorney General approval is
obtained. (Cal. Corp. Code § 5236).
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Franchise Tax Board by filing the amendment with the applicable tax returns for the year in which the
amendment became effective.
The Corporation must also notify the IRS of an amendment to its articles of incorporation or bylaws for
the year in which the amendment became effective. If the Corporation files a Form 990 or 990-EZ, the
amendment must be described on Schedule O. If the Corporation is not required to file annual returns, it
must report the amendment to the IRS Exempt Organizations Determinations Office. For more
information about reporting changes to the articles and bylaws to the IRS, please refer to the instructions
to the Form 990 or 990-EZ.
In addition, the Corporation must report new, significant program services or significant changes in how
it conducts program services on its annual state and federal returns.
8) Health and Safety Hazardous Materials Fee
Health and Safety Code § 25205.6 imposes a fee on corporations operating in California relating to
hazardous materials. There is no general exception for nonprofit corporations. If the Corporation has 50
or more employees, this fee likely applies. The fee must be paid by the last day of February and late
payments are subject to a penalty of 10% plus interest. More information is available on the State Board
of Equalization website at www.boe.ca.gov and on BOE Publication 90 (www.boe.ca.gov/pdf/pub90.pdf).
9) Accounting and Financial Information
As may be evident from the information described above, nonprofit organizations are subject to various
tax, accounting and financial reporting requirements. We suggest that you consult with an accountant
knowledgeable about nonprofit corporations to help establish appropriate accounting and reporting
procedures.
F. Conclusion
This memorandum outlines many of the legal requirements and challenges the Corporation will face in
order to maintain its corporate and tax-exempt status. The memorandum is summary in nature and
designed to give those responsible for the operation of the Corporation a general idea of the issues that
may arise, but it is not intended to substitute for on-going consultation with counsel. We encourage you
to contact counsel for further clarification or advice, or if you have any questions, please feel free to
contact me at [Attorney contact information].
4842-1089-4363, v. 2
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